Digging Into Last Year's Biggest Winners

You know what's bizarre about the five best-performing stocks in the S&P 500 last year and the five worst-performing stocks in that index? After tremendous advances in the winners, I still like most of them -- and after horrific declines in the latter, I still hate most of them.

One of the great exercises in investing, though, is to force yourself to question assumptions about everything from your favorite stocks to those you most abhor, and 2013's crop of beauties and beasts is no different. It's times like these when you have to play your own contrarian, to really go against yourself and see if you can find an unloved ugly duckling that could turn into a beautiful swan. Or, conversely, you could discover which beautiful swan may turn black, obliterating your gains.

Today I want to look at the S&P's five biggest winners for 2014 and put them through a jaundiced eye.

First up: Netflix (NFLX). Here's a stock that put in a 297% gain for 2013, with a rally from $92 to $368, and it finished the year with market capitalization of about $22 billion. Netflix is a phenomenon -- one of the cult stocks that I talk about, along with Solar City (SCTY), Twitter (TWTR) and Amazon (AMZN). Although like the latter, I am still recommending that people can own Netflix.

Why? Because I like to do market-cap analysis. What drew me to Netflix in the first place was its tremendous number of satisfied users, of which I count myself one. My kids told me about Netflix well before its near-300% gain, and they showed me how to stream video over my Wi-Fi in a way that made it so I never had to mail in a diskette again. We are not alone in loving it. More than 31 million Americans use it, and another 9 million abroad seem to love it, too. When Netflix shares were lower, I urged Apple (AAPL), Microsoft (MSFT), Yahoo! (YHOO) and Facebook (FB) to buy it, and use some of that cash for growth. Netflix represents a real chit in the old tech game that's working: the holy trinity of mobile, social and the cloud that I identify in Get Rich Carefully as the most important multiyear trend currently out there.

You know what? There's a simple, dirty truth about Netflix: We would hate to admit it out loud, but we would all be willing to pay more for it. That's how much we love it. To me that means there's no way this company is worth only $22 billion. It's a concept too big for its market cap. I think the stock will go higher until we see subscriber growth peak. But, because that eventually has to happen, I think if you own Netflix you should switch into deep-in-the-money calls in order to protect yourself on the downside.

The next-biggest S&P winner was Micron (MU), the chipmaker. Shares rose 243% last year, from $6 to $21. I still like Micron because it is part of a slap-happy oligopoly in dynamic RAM (DRAM), having bought a gigantic Japanese semiconductor concern that had gone bust. I also like the company's exposure to flash memory, which is an amazing kind of memory chip with ever-expanding usages.

Would I buy Micron? Here's the issue. First, there's no doubt you'd be coming in late at this point. Why? Because the company makes commodity chips, and when pricing gets as strong as it is now, someone always blinks and decides to put up more factories in order to take advantage of the increased pricing. Then the price wars begin, and the average selling price goes down. That's where we appear to be right now with Micron as we hear rumblings of new factory additions.

That's why this stock has an extremely low 10x earnings multiple. People expect the earnings to collapse. The saving grace, though, is that skeptics have been saying the same thing about the makers of another commodity product, disk drives -- notably Seagate (STX) and Western Digital (WDC) -- and these companies have maintained excellent price discipline.

Still, I think that at Micron's $22 billion market cap, I think it might just be too late to stay long this gem. A couple of new factories will make both markets oversupplied, and whenever you even hear a whiff of plans for a foundry, you will be shadow­boxing with well-trained bears.

Third? Best Buy (BBY). We saw this stock rally 236% last year, as it had been left for dead but came roaring back to life with new management and renewed vigor. Best Buy has closed weak stores and offered competitive prices, and it has pretty much become the only game in town for those who need help buying and installing hard goods that can't be done, or even lifted, for that matter.

There's only one problem: The stock has pretty much won over everyone who had previously been a skeptic. Now the big analyst bashers are all backers, and when that happens it's better to have one foot out the door than it is to have both feet in. I think Best Buy's stock is going to have to come down to recharge. But, when it does, the economy will still be strong enough that I think you'll want to buy it.

Fourth is Delta (DAL), and of the top five winners in the S&P, this is the one that I think must be bought right here -- because this company is benefitting from the fantastically positive acquisition of American Airlines (AAL) by U.S. Airways. The airlines, in just a couple of years, have gone from being totally uninvestable money-losers to being among the best stocks out there. Even though Delta rose 131% in 2013, the stock can still fly higher.

Now, I prefer the new American Airlines because of the synergies from the merger, and I think the integration will go smoothly. But Delta has transformed itself from being an indentured servant to the bond market to being a cash spewer, and I think that the stock's got a lot of room left to run. Delta is one of those stocks that shouldn't be allowed to make as much money as it's able to now. But the Justice Department has blessed a series of incredibly anti-competitive mergers, and that has given this company a multiyear runway to make a ton of money.

Rounding out the top five S&P winners? E*Trade (ETFC), which rallied 119% as the company made a major comeback just as the individual investor seemed to come back. I think that, even after this run, the stock is cheap. Still, at this point I would prefer KCG (KCG), the old Knight Capital Group. KCG is an amalgam of players that benefit when individuals return to investing and we get an increase in trading -- something that I think will happen in 2014. More important, KCG has a terrible balance sheet that could benefit from multiple refinancings that could still take place, as rates remain dramatically low vs. what the company currently pays. As with E*Trade, KGC has had a big run, but it's only worth $1.3 billion -- far too low, given the opportunity.

Of all of these, I have to say that my favorite is definitely Delta. The main reason? As part of this exercise you have to ask yourself: "Is the stock overly loved?" I can tell from Twitter postings than there is massive interest in the momentum stock that is Micron. Netflix has to be the most popular stock among youth that I have ever seen, with the possible exception of Facebook -- which, itself, was up 105% last year and is no slouch in its own right. Best Buy is loved by too many analysts; they are all in the pool. E*Trade is going to need the Federal Reserve to start raising rates on those credit balances, and I don't know how soon that will happen.

But Delta? I don't know a soul who believes in me, even the people who have read Get Rich Carefully. Maybe that's why the bottom line is that Delta is my favorite of the top five performers in the S&P 500.

Stay tuned for a look at the bottom of the S&P 500 coming soon!

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